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IFRS 16
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Leases
IFRS 16-Leases

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The new lease standard – all started with
a plane!

“One of my great ambitions before I die is to fly in an

aircraft that is on an airline’s balance sheet.”
Sir David Tweedie Chairman of the IASB (25 April 2008)

“… approximately $1.25 trillion in non-

cancellable future cash obligations committed
under operating leases …. are not recognized
on issuer balance sheets…”
The Economist, Jan 21st 2012
SEC 2005
PwC
IFRS 16 – and now it is flying?!

• January 2016: Final

standard
• Effective date: 1
January 2019 (earlier
adoption in conjunction
with IFRS 15 permitted)
• Replaces IAS 17

+ 98% 35% + 41%

+ 47% 50% + 33%

+ 42% 40% + 15%

+ 36% 62% + 24% PwC, A study on the impact of

lease capitalisation IFRS 16: The
new leases standard, p. 5

PwC
What are we telling our clients:

Lessees have to show a lease liability for almost every

lease contract so there will be a huge impact on KPIs
(e.g.. EBIT/EBITDA; debt to equity ratio)

Lessee has to identify each lease contract

Clients need to put in place systems and processes to

capture information/determine measurement

Clients need to communicate the effect of the new

standard to the outside world

………..2019 is not that far away!

PwC
 D1. “Under IFRS 16 lessees have to recognise a
lease liability for every lease contract”

YesThere are exemptions for

short-term leases and
leases of low-value assets

No

PwC
PwC
 D2. “Under IFRS 16 lessor accounting stays
substantially the same”

Yes
Be aware of new
disclosures!

No
PwC
PwC
 D3. “Under IFRS 16 variable lease payments
that are not based on an index or a rate are
generally part of the lease liability.”

They are taken into

account if they are in
Yes substance fixed!
To be covered later
on…..

No
PwC
PwC
Agenda

Overview – what it’s all about!

Definition of a lease

Lessee accounting

PwC
Scope of IFRS 16

Lease = A contract, or part of a contract, that conveys the right to use an

asset (the underlying asset) for a period of time in exchange for
consideration.
All leases are in the scope of IFRS 16, except for:

Lease to explore for or use non-regenerative resources Out of scope

Biological assets within the scope of IAS 41 Out of scope
Service concession arrangements within the scope of Out of scope
IFRIC 12
Licences of intellectual property granted by lessor within Out of scope
the scope of IFRS 15
Rights held by lessees under certain licensing agreements Out of scope
(motion picture films, patents, copyrights etc.)
Other intangible assets Policy choice for lessees
PwC
 Definition of a lease

1 There is an identified asset

No identified asset if supplier has substantive right to substitute

asset

and
2 Contract conveys the right to control the use of an
identified asset

Right to obtain substantially all of the economic benefits from

use of the identified asset throughout the period of use and

Right to direct the use of the identified asset throughout the period
of use
PwC
 Definition of a lease – identified asset

Identified asset
 Identified asset can be specified explicitly (e.g. serial number) or
implicitly
 Right to substitute the asset is substantive if
a) supplier has practical ability to substitute and
b) supplier would benefit economically from substituting
 Practical ability:
a) supplier has right to substitute asset and
b) alternative assets are readily available or could be sourced
within a reasonable period of time

PwC
 Definition of a lease – identified asset

Identified asset
 Right or obligation to substitute in case of asset not working
properly or in case of technical upgrade not substantive
 Substitution rights that can only be exercised on or after a
particular date or at the occurrence of a future event
 not substantive
 Assessment shall exclude future events that are not considered
likely to occur
 When lessee cannot readily determine whether right is substantive
 presumption that right is not substantive

PwC
 Definition of a lease – identified asset

Portion of assets

Physically distinct portion Capacity portion

e.g.. floor of a building

Identified asset No identified asset

(provided the other criteria are (unless portion represents
met) substantially all the capacity and
other criteria are met)
PwC
 Definition of a lease –
Right to control the use

Customer has the right to obtain substantially all of

the economic benefits throughout period of use
For example:
 Primary output and any by-products
 Payments from third parties relating directly or indirectly to use of
asset (e.g. renewable energy credit resulting from use of a solar farm)
 Excludes: Benefits relating to ownership of asset (e.g. tax credits
relating to the ownership of the underlying asset)

PwC
 Definition of a lease –
Right to control the use

Customer has the right to direct the use

throughout period of use if
 Right to direct how and for what purpose
asset is used throughout period of use or
 Relevant decisions are predetermined and
(a) customer has the right to operate the asset throughout period
of use or
(b) customer designed the asset (or specific aspects of the asset) in
a way that predetermines how and for what purpose the asset
will be used
Protective rights of the supplier do not prevent the customer from
having right to direct the use

PwC
 Definition of a lease –
Right to control the use

Fibre-optic cable:
How do you determine who has the relevant decision making
rights?

When and whether to light the fibres?

What and how much data the cable will transport?

How to run the cable?

Through which routes the data will be delivered?

PwC
 Definition of a lease - process
no
Is there an identified asset?
yes
Does the customer have the right to obtain substantially all of the economic no
benefits from the use of the asset throughout the period of use ?
yes
Who has the right to direct how and for what purpose the asset is used
throughout the period of use ?

Customer Predetermined Supplier

yes no
Customer
 operates the asset or
 has designed the asset?

Contract contains a lease Contract does not contain a lease

PwC
D4. Concession space

• Company A enters into contract with airport operator to use space

to sell goods for three-year period.
• Contract states exact amount of space and that the space must be
located at any one of several boarding areas within the airport.
• Airport operator can change location at any time;
minimal costs to airport operator associated with doing so.

Does the contract contain a lease?

Identified asset? Substantive substitution right! no

Substantially all of the economic benefits? n/a

Right to direct the use? n/a

The contract does not contain a lease.

PwC
D5. Retail unit

• Contract conveys exclusive use of explicitly specified retail unit

• Supplier can require Customer to move to another unit; several similar units
are available
• Supplier benefits from relocating only if there is a new tenant that pays a
certain rate; it is possible that these circumstances arise but not likely
• Customer makes all decisions about use of retail unit throughout period of use
• Payments: fixed component plus percentage of sales

Does the contract contain a lease?

Identified asset? Substitution right is not substantive!

✓
Substantially all of the economic benefits?
✓
Right to direct the use?
✓
The contract contains a lease.
PwC
D.6 Network services

• Customer enters into contract with Supplier for network services for 2 years;
supplier supplies network services that meet a specified quality level.
• Supplier installs and configures servers at Customer’s premises to supply
services. Supplier determines speed/quality of data transportation and can
reconfigure/replace servers when needed to continuously provide the
network services.
• Customer does not operate servers or make any significant decisions about
their use.

Does the contract contain a lease?

Identified asset? n/a

Substantially all of the economic benefits? n/a

Right to direct the use? no

The contract does not contain a lease.

PwC
 Lease term (1/2)

Non-cancellable period of lease

+ lessee is reasonably certain to

Periods covered by if
option to extend exercise option

+
if lessee is reasonably certain not
Periods covered by option to terminate
to exercise option

Assessing “reasonably certain” – consider all facts/circumstances creating

economic incentive to exercise, e.g.:
 contractual terms/conditions for optional periods compared with market rates
 significant leasehold improvements undertaken (or expected to be undertaken)
 costs relating to termination of lease/signing of new replacement lease
 importance of underlying asset to lessee’s operations
 conditionality associated with exercising the option
PwC
 Lease term (2/2)
Reassessment of the lease term when

Modification of contract Exercise of option becomes or ceases to

not accounted for as be reasonably certain
separate lease (lessee)
Because:
 Event occurs that obliges lessee to exercise
[prohibits from exercising] option or
 Lessee does not exercise [exercises] option
previously included [not included] in lease
term or

 Significant event or significant change in

circumstances within control of lessee occurs
and affects reasonably certainty of exercising
option
PwC
D.6.2. Example, Assessing the lease Term
• Entity A enters into a perpetual lease of retail space. Both the lessor and the lessee have
termination options. Termination options exercisable at any time; the entity exercising it will bear
no more than an insignificant penalty. For both options, there are notice periods.
• If the lessee exercises its option, the termination will be effective six months after exercise. If
the lessor exercises its option, the termination will be effective 18 months after exercise.
• lessee is reasonably certain to continue the lease for a period of 60 months if the lessor does
not exercise the termination option.

What is the lease term of the contract at the

commencement date?
18 months
A. 6 months B. 18 months C. 60 months

PwC
Recognition and measurement
exemptions

Short-term leases
• Lease term of 12 months or less (may include periods covered by options)
• Accounting policy choice (by class of underlying assets)
• Reassessment in case of modification or change in lease term
• Only applicable for lessee

Low value assets

• Assets with a value, when new, of USD 5,000 or less
• Accounting policy choice (lease-by-lease basis)
• Only applicable for lessee

PwC
Recognition and measurement
exemption
- Portfolio approach (3/3)

Lease contracts with similar characteristics

and
Applying standard to portfolio does not differ
materially from applying to individual leases
within portfolio

Portfolio approach permitted for

lessee and lessor

PwC
 D7. “Most lease contracts result in the
recognition of a right of use asset and a lease
liability for the lessee.”

Yes

No

PwC
PwC
 D7. “Most lease contracts result in the
recognition of a right of use asset and a lease
liability for the lessee.”

Yes

There are exemptions for

No short term leases and
leases of low value assets.

PwC
D8. Recognition and measurement
exemptions?

Entity A enters into a lease of small office space.

Lease continues in perpetuity, but both the lessor and the lessee have
termination options, exercisable at any time, with a three-month notice
period. The entity exercising the termination option will bear no more
than an insignificant penalty.

Does the contract qualify as a short-term lease for the lessee?

Yes No

PwC
PwC
D8. Recognition and measurement
exemptions?

Entity A enters into a lease of small office space.

The lease continues in perpetuity, but both the lessor and the lessee
have termination options. The termination options are exercisable at
any time, with a three-month notice period. The entity exercising the
termination option will bear no more than an insignificant penalty.

Does the contract qualify as a short-term lease for the lessee?

Yes No

PwC
 Lessee accounting
initial measurement (1/5)
Right-of-use asset Lease liability

Lease liability Lease payments

Lease payments made before Discount rate

or at commencement date

Restoration costs
Provision
Initial direct costs

Interest expense
Depreciation/Impairment

PwC
D9. “The carrying amount of the right-of-use asset normally
equals the carrying amount of the lease liability.”

Yes

No

PwC
PwC
 PollEv.com/
D9. “The carrying amount of the right-of-use asset normally
equals the carrying amount of the lease liability.”

The measurement concepts for

the right-of-use asset and the
Yes
lease liability are substantially
different

No

PwC
 Lessee accounting –
initial measurement (2/5)
Lease payments

Fixed payments  Including in-substance fixed payments

+
 Only if they depend on index/rate
Variable lease payments
 Measured using index/rate as at
+ commencement date
Residual value guarantees  Expected payments lessee has to
+ make under guarantee
Exercise price of a if the lessee is reasonably certain
purchase option to exercise the option
+
the lease term reflects the
Penalties for terminating if
termination by the lessee
PwC
 Lessee accounting –
initial measurement (3/5)

In-substance fixed
Variable lease payments
payments
dependent on ….

rate/index other variable

e.g. inflation/ e.g. sales in a retail store e.g. payments made only if
interest rate or asset is proven capable of
market rental rates operating

Part of lease Not part of lease Part of lease liability

liability liability

PwC
 Lessee accounting –
initial measurement (4/5)
Discount rate
Interest rate implicit in the lease

if rate cannot be readily

determined

Incremental borrowing rate at commencement date

Initial direct costs

 Incremental costs of obtaining a lease that would have not been
incurred if lease had not been obtained
 E.g.: commissions, payments to existing tenant to obtain lease

PwC
 Lessee accounting –
initial measurement (5/5)
Restoration costs
 Costs to
 Restoring underlying asset to conditions required by lease
contract
 Dismantle and remove underlying asset
 Restore the site on which underlying asset is located

 Measured at estimated costs (IAS 37)

PwC
 Lessee accounting –
subsequent measurement

Right-of-use asset

 Depreciation (in general on straight-line basis)

 Impairment test based on guidance in IAS 36
 Adjustments for remeasurement of lease liability
Lease liability

 Measured using effective interest rate method

 Remeasured to reflect reassessment, modifications or revised in-
substance fixed payments
Variable lease payments
(not dependent on rate/index)

 Recognised in profit/loss in period in which incurred

PwC
 Other measurement models for
right-of-use asset

Property, plant and equipment

Lessee may elect to apply revaluation model in IAS 16 to right-of-use asset (by
class) if
a) it relates to a class of property, plant and equipment and
b) lessee applies revaluation model to all assets in that class

Investment property

Lessee shall apply fair value model in IAS 40 to right-of-use asset if

(a) it meets definition of investment property in IAS 40 and
(b) lessee applies fair value model in IAS 40 to its investment properties

PwC
Lessee accounting – presentation

Statement of cash flows

Cash flows from operating activities Depending on

entities’ policy for
Short-term lease payments interest payments
Payments for leases of low value assets
Variable lease payments not included in lease liability
Cash payments for the interest portion of the liability

Cash flows from financing activities

Cash payments for the principal portion of the liability

Cash payments for the interest portion of the liability

Disclosures Link
PwC
 Disclosures – lessee

Quantitative disclosure requirements:

(a) Lease expense, split between amortisation of ROU assets and interest expense
(b) Lease expense, split by class of underlying asset
(c) Short term lease expense
(d) Small asset lease expense
(e) Variable lease expense
(f) Sublease income
(g) Total cash flow for leases
(h) Additions to ROU assets
(i) Gains and losses arising from sale and leaseback transactions
(j) Carrying amount of ROU assets, split by class of underlying asset

• This table covers the major disclosure requirements; depending on the particular facts and circumstances additional
disclosures might be necessary.
• Maturity analysis of lease liability and additional information to meet the disclosure objectives are also required.

PwC
 Disclosures – lessee

Qualitative disclosures
Nature of the lessee’s leasing activities
Restrictions or covenants imposed by leases
Sale and leaseback transactions

* This table covers the major disclosure requirements; depending on the particular facts and circumstances additional
disclosures might be necessary.

PwC
Disclosures – lessor

Distinction based on
Classification risk and rewards

Lease receivable
Finance lease (net investment in lease)

Operating
Underlying asset
lease
No significant change compared to
current guidance

PwC
 Transition

Transition
Date of initial application
Lessees = 1 Jan 2019

Dec Dec
2018 2019

Full
Retrospective IFRS 16 IFRS 16
• Apply IAS 8
Adjust equity*
at 1 Jan 2018
with cumulative effect

• Measurement
Simplified IAS 17 IFRS 16 simplifications for
approach leases previously
classified as
No restatement Adjust equity* operating leases
at 1 Jan 2019 and finance leases
with cumulative effect
* retained earnings or other component of equity

PwC
 Business impact
Scoping
Data gathering/validation
Judgments & Estimates
Project Management
Resources & Training
Disclosures
Transition options
Lease automation
Involvement of IT group
Design new business and
technical requirements
Software vendor selection
Implementation and
integration IT solution

Imp
Finance, IT, Treasury
act Lease versus buy
decisions
Real Estate
Lease portfolio
Procurement
optimisation
Tax
Benchmarking vendors
Financial planning/control and spending profile
Investor relations Cost savings and
Audit committee operational benefits

PwC
Recap………

Lessee has to present interest expense

Lessee has to recognise a right-
of-use asset and a lease
liability for almost all lease
contracts
Exemptions for short-term
leases and leases of low
value assets
(on lease liability) and depreciation
charge (for right-of-use asset) separately
Huge impact on KPI
(debt/equity ratio;
EBIT/EBITDA/ operating
cash flow)

Lessor accounting stays

almost the same as
under current guidance Enhanced disclosure
requirements
Effective date
1 January 2019
IFRS 16 was
published on
13 January 2016 Earlier application
permitted (together
with IFRS 15)

PwC
Have a good flight!

May 2018

PwC